Clarifying whether Kenya Airways made profit or loss
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
07 October 2018
Last week I mentioned
how some one claimed that Kenya Airways had made a profit even though
the financial report clearly showed a loss. The [flawed] argument went
like this: since the company reduced the loss from Sh5.6 billion to
Sh4B, this means that it made a profit of Sh1.6B.
As explained in the
previous article, this argument is totally mistaken. The financial
report says that sales during the period were Sh52B while the expenses
were Sh56B. Obviously, the result is a loss of Sh4B.
Still, a reduction of
loss from Sh5.6B to Sh4B is an improvement. So, what is the percentage
improvement?
To answer that
question, we must go back to basic principles. When calculating
percentage change, we subtract the final value from the starting one;
then divide the result by the starting value and multiply by 100.
For example; if
something changes from 10 to 12; we do 12 – 10 = 2. Then we divide 2 by
10 (the starting value) and multiply 100. That is, 0.2 x 100 = 20. So,
the answer is 20%.
In the case of Kenya
Airways, the starting value is -5.6 and the final one is -4 (notice the
negative signs in these values). The difference is (-5.6) – (-4). I have
added the brackets for clarity.
The answer is -1.6.
This is also a negative value. In the next step, we divide this
difference (-1.6) by the starting value (-5.6). Whenever a negative
number is divided by another negative number, the result is positive. In
this case, it is +0.29 or +29%
So, Kenya Airways
reported a 29% increase in profit. Now that might sound confusing: we
are talking about an increase in profit yet we have established that the
company made a loss. Isn’t that a contradictory statement?
To be clear: let me
emphasise that the company reported a PROFIT of negative Sh5.6B. This
can also be stated as a LOSS of positive Sh5.6B.
I discussed this
issue at some length in May 2016 and explained that what we call a loss
is actually a negative profit. Conversely, a negative loss is really a
positive profit. If you are still confused, dig out the article of 1st
May 2016.
Therefore, if the
financial report calls the result “loss”, then the amount should be
indicated as a positive quantity.
I too a look at what
Kenya Airway published and found that the bottom line of the income
statement reads: “Loss for the period: (Sh4,035M)”. The brackets are the
conventional way to indicate that it is a negative quantity.
This is inaccurate
and misleading. A loss of negative Sh4,035M is equivalent to a profit of
that amount! What the directors of Kenya Airways should have stated is:
“(Loss) for the period: (Sh4,035M)”.
That is, both the
word “loss” and the amount of money should be in brackets. Indeed,
common practice is to write: “Profit/(Loss) for the period”.
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